Thursday, September 13, 2007

In The Front Line, The Insurance Industry's Response to Climate Change

From REO Research. These guys don't pull their punches. Any idea what this comment from the key findings means:

More accurate pricing by the insurance industry is important not only for the sector’s own health, but also in helping society be better prepared for the changing climate: accurate price signals can deter investment from unsustainable locations.

In the US, insurers who take the extreme route of withdrawing from high risk regions may face short-term gains as their exposure to large losses is reduced. However, few seem to have considered the medium-long term impacts of such a strategic decision and look likely to face reduced market share and steeper competition from new entrants or government insurance providers down the line.

All trends indicate that climate change is impacting the insurance sector through the value chain from catastrophe modellers to re-insurers to direct insurers and ultimately to end customers.

However, severe bottlenecks remain that prevent the markets from pricing climate risk accurately and driving loss-reducing behaviour. All parts of the value chain will need to adjust in order to preserve the benefits of private insurance markets; some of these adjustments will be painful. For instance:

■ Regulators will need to reduce their hold on insurance pricing and withdrawal of coverage, and allow insurers to pass on higher risk through higher pricing

■ Treasuries will need to dedicate significant sums to climate-proofing densely-populated areas through investment in public infrastructure, such as flood defences and brushfire clearing

■ Governments will need to set tighter building standards for property development and refurbishment, in order to reduce losses and keep insurance prices affordable

■ Very high-risk areas will need to be classified as “uninsurable.”This will mean fewer coastal developments and an increase in self-insurance.